Political risk premium surges again! Presidential candidates confront each other on fiscal policy, and shares of France’s three major banks collectively decline

According to the Zhihui Finance APP, political risk in France is shifting from a tail-end disturbance ignored by the market to a real risk premium on European assets. After Macron called early parliamentary elections, a hung parliament, the rise of the far right, ongoing government changes, and budget deadlocks have persisted. France’s public debt ratio has now surpassed 116% of its gross domestic product, and the fiscal deficit exceeds 5%. The yield on 10-year French government bonds briefly broke through 4.13%. This domestic political uncertainty has recently dealt another heavy blow to the country's bank stocks: BNP Paribas and Crédit Agricole saw share prices fall as much as 4.4%, while Société Générale dropped as much as 4%, dragging down the STOXX Europe 600 Bank Index.

Wall Street giant Goldman Sachs previously warned that the rise of populist fiscal policies in France could lead to further deterioration of the country's debt. As the 2027 presidential candidates put forward sharply different views on spending, debt, and EU policy, French bank stocks have once again become the most sensitive risk proxies—the real threat is not their substantial holdings of French government bonds, but the secondary transmission of rising sovereign risk premiums to financing costs, credit demand, and asset quality.

The core reason for the decline in French bank stocks is undoubtedly the resurgence of market concerns over political instability ahead of a key debate on Thursday; it is expected that presidential candidates will lay out their respective visions for the country's future in this debate.

Several leading French presidential candidates are expected to outline sharply different development paths for the eurozone's second-largest economy on Thursday evening, during an event aimed at business leaders. Who will succeed Emmanuel Macron next year, and what this means for France’s already heavily pressured public finances, are uncertainties in both politics and economic growth that continue to weigh on the country's outlook.

Since centrist Macron, who advocates pro-business policies, decided to call early elections more than two years ago, France has faced ongoing political turmoil, and its bank stocks have often been among the hardest hit sectors. This is a key reason why French bank shares have generally underperformed their competitors elsewhere in Europe.

Unlike banks in Italy or Spain, which were at the center of the European sovereign debt crisis, France’s domestic commercial banks hold noticeably less of their own government debt—over half of France’s sovereign bond assets are held by international investors. Some analysts note that the real risk is not French banks’ exposure to government bonds, but the second-order effects of rising refinancing costs and an economic slowdown resulting from the growing standoff between Macron’s centrist leadership and the far right’s increasingly opposing economic stances.